Rebalancing the books: How to make the 2015 spending review work for all of Britain

Rising demand for public services, moves to reduce the welfare bill and the geographical iniquities of previous spending reviews together mean that the 2015 spending review will need to be substantively different.

The last two spending reviews, in 2010 and 2013, focused on deficit reduction largely through public sector spending cuts as opposed to tax rises. Although the economy is now growing, deficit reduction is here to stay. The limits to this approach though are clear to see. With the NHS, schools and DfID aid spending ringfenced and significant parts of social security spending, such as pensions, protected from any cuts, the room for manoeuvre is becoming increasingly limited.

Public sector spending cuts have presented an opportunity for significant reforms in the way the state delivers public services and configures the welfare state, but these have yet to be properly aligned with moves to tackle the root causes of the rising demands that are being placed on services and the public purse. The enthusiasm to cut out-of-work benefits and tax credits has not been matched by an economic strategy to create jobs and growth where it is most needed. As a consequence, the welfare bill continues to rise.

The government has also been indifferent about assessing the distributive impact of its spending decisions. Household decile analysis has revealed the extent of cuts to individuals and families at different points in the income distribution, but we are much less well aware of the impact of spending decisions on the different regions of the country.

Last year, our Northern Economic Futures Commission set out a 10-year strategy for achieving economic growth in the north of England, which included the decentralisation of a wide range of powers to enable city-regions to drive growth and jobs in the north. The relationship between economic growth and public sector reform is fundamental. Unlocking growth can create the jobs that will put downward pressure on the welfare bill, and by reforming public services we can achieve greater efficiency and better results for our public spending.

This report presents the building blocks of a funding settlement that will match the aspirations of our growth strategy. It is not a plea for a fairer allocation of public money. It is an argument for a more strategic spending review process that can unlock growth and drive public service reform.

We make recommendations for the terms of the next spending review under five major headings:

decentralisation of economic development spending to city-regions

rebalancing economic investment spending

a growth earnback

tax and borrowing powers

business incentive schemes.

However, one of the most fundamental problems with spending reviews is the process by which they are undertaken:

settling terms with each department individually means opportunities for greater efficiencies are missed

the process is closed and lacks transparency

reviews tend towards grabbing the low-hanging fruit or relying on major efficiencies rather than strategically reorientating spending.

So, we make recommendations for changes to how the spending review is conducted, under three headings: